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Sunday, March 2, 2008

The Bad News Continues

Alan Abelson from Barrons called the news this week a continuation of the “extraordinary litany of woe” and I would have to agree. Though the equity markets tried to enjoy a bounce at the beginning of the week off good news about the monoline’s credit ratings, the economy once again took center stage on Friday. Although the President and his advisors are still in denial that we are in fact in a recession, the rest of the world seems to be of that belief. Given the evidence, it would be tough to argue. More and more we are reading about the possibility of stagflation which I have written about a few times over the past two months. To quote Alan- “Gold.. has proven a much better gauge of inflation that any of the laughable official measure our blessed government uses.” In case you missed it GOLD hit a high of $978 this week and more and more people think it will break $1000. I happen to agree. Over the past year oil is up 62%, soybeans up 88%, and wheat is up 164%. Sugar a staple in American’s diets is up 30% in the past two months alone. No inflation? Ya right….

And what about the credit markets?? The stories keep getting worse, much worse. The municipal markets are still a mess, pretty much all credit products is trading at it’s widest spread levels in forever, and hedge funds are starting to blow up left, right, and soon to be center. Lucky for them many of them can say “sorry you cannot have your money back.” I guess if they can do that in the muni market these days, why not hedge funds. I think everyone is going to start reading the small print.

A couple of headlines that I found particularly noteworthy this week:- A USA Today headline on Friday that said – “More Americans are using credit cards to stay afloat.” People are forgoing paying their mortgages in order to keep their credit cards current. That has never really been the case before but because housing prices have dropped so fast, and people living at the margin have so much debt as it is, they are thinking that they need to keep their credit cards or they cannot buy everyday necessities. I have said it before but I will say it again, every type of credit product will experience record delinquencies in the coming year, and credit cards will be one of them. - The Economist reported that “8.8 m mortgage holders, 17% of total, have home loans greater then the current value of their home.” ( Mark Zandi of Moody’s – www.economy.com) This number is BEYOND shocking. BEYOND.- Fannie Mae and Freddie Mac – Please do not get me started! Despite them both recording record losses in the billions regulators decided that they should be able to grow their portfolios as much as they want. According to BARRONS Fannie’s portfolio is 81 times it’s net work and Freddie’s is 167. Remember that although these agencies do provide a valuable service by reducing the cost of mortgages to American homeowners, they are also operate very much like hedge funds. One might even suggest that they are a government sponsored hedge fund. With leverage of 20 to 1 and 30 to 1 respectively, compared to the average hedge fund in the single digits, if they were private investors would have pulled out their money a long time ago and the regulators would have shut them down. But NO … let’s tell them to buy more.